As I outlined when making the case for RHG over the last 2 weeks, the credit markets are recovering. The Oz BBSR has fallen 20 bp, from a blowout of 60bp cf pre credit crunch; on friday the overnight LIBOR fell 4bp to 5.13 and the 3 and 6 month LIBORs fell 5bp.
As I explained to the word, these liquidity crunches may blind side those on the edges of the market but they also disappear very abruptly as liquidity returning to the system has a snowball effect. I have explained how critical these capital markets are to the modern financial system and that they have never in history remained seized up for more than 2 months. This 'sub-prime' crisis is just the latest in a series of credit crisis. Even cautious economists such as HSBC's John Edwards are now looking for a benign ending as the BBSR plummets as banks resume lending, and ABS are placed again. John was quoted the other day: “There may be another live bomb buried somewhere, but as of Friday last week it looked like the debt crisis was fading to an unexpectedly gentle end, and everything since has affirmed this view.”
I now expect rams will refinance its XCP before christmas and wont have to pay its current 12 + 25 bp above LIBOR rate for the full 180 days. Rams may look at switching to RMBS for this funding and retain its warehouse r/ship with NAB for its short term funding or it may stay with CP. Certainly if it looks to tie up longer term funding then it should return to trading at a PE multiple in excess of 15.
As I outlined when I first posted re RHG, NPAT for FY08 should be above 40m (11.5cps). I retain this target and that rams is worth north of 1.50. In fact it may be conservative as it presupposes RHG paying its penalty rate for funding for the full 180 days; and that RHG loses 5% of its loanbook growth due to bad publicity, based on released figures this has not eventuated.
Within the next 2-3 weeks UBS will follow the thundering herd and release a buy recommendation - if you wait for the market to rerate RHG you may miss out!
RHG Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
